Telecom Industry to Consolidate amid Hypercompetition in FY18

June 11, 2017

India Ratings and Research (Ind-Ra) has revised its outlook on the telecommunications services sector for FY18 to negative from stable-to-negative. The negative outlook reflects Ind-Ra’s expectation of longer and deeper than expected deterioration in the credit profile of telcos following the extended free services by Reliance Jio Infocomm (RJio – ‘IND AAA’/Stable).

A redistribution of market share among the existing telcos is underway as RJio gained a quick subscriber base of 72 million by January 2017 which could cross 100 million by March 2017. Rjio’s ability to retain market share would be driven by both pricing as well as user experience given the choice of complete reliance on voice over LTE (VoLTE) technology. The industry could witness the increase in the dual-sim phenomena in the interim. Thus the data and voice usage pattern for each telco could remain inconsistent and unpredictable. Retaining customer base will necessitate the telcos to continue to augment their capacity and coverage for superior speed and virtual network platforms.

Per capita data usage is likely to increase by about 35%-40% in FY18 to 1,250MB (FY16: 600MB; FY17-Projected: 900MB. A decline in data tariffs by 20%-30% will pull down average revenue per user despite higher volumes coming from rise in data usage. Ind-Ra expects voice revenue to moderate in FY18 on stagnant minutes of usage (MoU) and on further moderation in voice realisations which are expected to drop to 25 paisa – 28 paisa per minute from 30 paisa – 35 paisa currently. The incumbent telcos are moving towards more bundling of voice and data plans in line with RJio’s voice calling bundled-free with data. Blended average revenue per user (ARPUs) are slated to decline by 10% in FY18, according to Ind-Ra.

Credit profile is likely to weaken in FY18 with a fall in profits and a rise in debt, due to spectrum and network-related capex. Free cash flows will be negative due to the double whammy of weaker earnings and capex. Telcos will balance debt levels through monetising non-core assets in order to mitigate the pressure on credit profiles.

The industry has lost approximately 20% revenues due to free services by RJio. Consolidation in the industry will help a quicker return of pricing power.. The proposed merger of Vodafone Mobile Services Limited (Vodafone – INDAAA/RWE) and Idea Cellular Ltd (Idea) will be positive for the telecom industry by eliminating duplication of spectrum and infrastructure capex. Smaller telcos may not be able to sustain cash burn by operating independently and are looking for exit options. The Rating Outlook for FY18 for the rated entities is Stable to Negative despite industry outlook being negative.

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